Investing requires discipline and managing reactions
June 16, 2016
Achieving long-term investing success requires managing your reaction to short-term failures.
Most investors consider a failure as a period of time when their investments do not perform as hoped. Human overreaction to disappointment with investment lows often results in selling an investment and not being able to participate in its recovery.
Every time we have a significant market correction some investors sell at a low and often do not reinvest until the market has recovered and their confidence has returned.
This is backwards.
Investment theory is “buy low and sell high” however in practical terms we often do the opposite.
This column will offer suggestions that will hopefully result in you improving your investing success.
The starting point is to have a well-diversified investment portfolio that reflects your ability to withstand the ups and downs of the market.
This will allow you to participate in stock market returns over time.
Market declines have always recovered, however the same is not true for individual stocks: sometimes they are at the mercy of the emotions of the shareholders.
Be strategic when constructing your portfolio. Again, I recommend having a diversified portfolio.
For example: it’s more likely that securities in the same industry will do poorly at the same time.
To reduce your risk, own securities that don’t perform alike.
Also, knowing that stocks and bonds don’t usually move in the same direction, you can lower your risk, without sacrificing potential returns, by allocating some of your portfolio to the bond market.
This will provide you with the confidence to resist the temptation to bail just because the market took a downturn.
Markets have a habit of declining.
That is why they are called markets and it is all very normal.
The reality of making money is you have to be prepared to lose from time to time.
Three ingredients are required to be a successful investor. Trust, discipline, and good communication.
You have to trust your financial advisor or your own ability if you do it yourself.
Trust that your diversified portfolio will perform well over time.
If you do not have a sufficient level of trust we recommend you consider reducing the amount of money you have invested in stock markets and potentially avoid stocks entirely.
Better to admit there is insufficient trust and be out of the market rather than participate in a down turn if you are likely to sell.
Enforcing trust requires strong discipline.
Discipline to reconfirm that your long-term objective of achieving acceptable returns is possible based on a well-constructed logical portfolio.
If you are working with a financial advisor, communication is key: asset allocation is the direct result of your time horizon (how long you hold a stock before liquidation), risk tolerance, and financial goals.
Advisors can also be beneficial during times of poor market returns because their role is to reinforce the long-term nature of investing.
Resisting the urge to panic can be helped by looking at historic investment performance numbers.
You might have a target return of, say, six per cent annually from your investments.
Look at past annual returns from similar investments and see that very rarely do you actually make six per cent. Some years you will make more and in some years you will make less.
There is a fair amount of volatility hovering around an annual return of six per cent.
Do not be surprised by market volatility because in reality some years are good and some years are bad.
For most investors the key to success is managing their own personal behaviour.
Start with a logically constructed investment portfolio and then add trust, discipline, and good communication.
Investing success is more likely to happen to those that follow a disciplined approach.